Question 1

Which of the following is not a difficulty concerning beta and its estimation?

Accepted Answer

The beta of the market is generally considered to be 1 and does not change over time, as it represents the average risk of the market as a whole.

Question 2

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 3

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Accepted Answer

If investors expect inflation to increase, the risk-free rate would likely increase, leading to a higher required return for an average share.

Question 4

Which of the following statements is most correct?

Accepted Answer

Statements a and c are both correct.

Question 5

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

Accepted Answer

A is the only statement that accurately describes the required conditions for market equilibrium. The expected rate of return must be equal to the required rate of return in order for investors to be satisfied and not pushed to buy or sell, causing price pressure. The past realized rate of return may have some influence on expectations, but it is not a direct determinant of market equilibrium. The realized rate of return may deviate from the expected rate of return temporarily, but if the expected rate of return is still equal to the required rate of return, then the market will eventually adjust back to equilibrium. Therefore, D is not a correct statement, as it includes the incorrect statements B and C.

Question 6

Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio?

Accepted Answer

The answer of Choose the correct answer for the following:...

Question 7

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 8

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 9

Which of the following statements is false?

Accepted Answer

While managers should act in the best interests of their shareholders, they do not necessarily need to know their shareholders' time preference or risk tolerance. They simply need to maximize shareholder wealth while staying within legal and ethical boundaries.

Question 10

You have developed the following data on three shares:  If you are a risk minimiser, you should choose Share __________ if it is to be held in isolation and Share __________ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

To determine which share is the best choice for a risk minimizer, we need to consider some key measures of risk: expected return, standard deviation, and beta.

Based on the data given, Share A has the highest expected return, but also has the highest standard deviation and beta. This means that while it has the potential for high returns, it also has a higher risk of volatility and its returns are more closely tied to market movements.

Share C, on the other hand, has the lowest expected return, but also the lowest standard deviation and beta. This means it has lower risk and is less affected by market movements, but also has a lower potential for returns.

Share B falls somewhere in between, with a moderate expected return, standard deviation, and beta.

For an investor looking to minimize risk when holding the stock in isolation (i.e. not part of a diversified portfolio), Share A would not be the best choice. Share B or Share C would be better options, as they both have lower risk profiles. However, if the stock is part of a well-diversified portfolio, it is reasonable to include Share A due to its high potential returns. In this case, the best choice would be Share B.

Therefore, the answer is B: A; B.

Question 11

In a portfolio of three different shares, which of the following could not be true?

Accepted Answer

The beta of a portfolio is a weighted average of the betas of the individual shares. Therefore, it cannot be less than the beta of each individual share.

Question 12

Share A has a beta of 1.5 and Share B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

Accepted Answer

In equilibrium, a higher beta indicates higher systematic risk and thus a higher expected return according to the Capital Asset Pricing Model (CAPM). Therefore, Share A, with a beta of 1.5, will have a greater expected return than Share B, which has a beta of 0.5.

Question 13

All else equal, risk averse investors generally require __________ returns to purchase investments with __________ risks.

Accepted Answer

The answer of All else equal, risk averse investors generally...

Question 14

According to the following information, which of the shares would be considered riskiest in a diversified portfolio of investments?

Accepted Answer

Beta is a measure of a stock's volatility in relation to the overall market. A beta above 1.0 indicates that the stock is more volatile than the market as a whole, and a beta below 1.0 indicates that it is less volatile. Therefore, Share TUV, with the highest beta, would be considered the riskiest in a diversified portfolio. The other measures (standard deviation and s/b ratio) are also important factors to consider in risk assessment, but beta is a particularly useful measure in the context of overall portfolio risk.

Question 15

Which of the following statements is most correct?

Accepted Answer

When two shares have a correlation coefficient of zero, they are uncorrelated, and combining them in a portfolio can reduce the overall portfolio risk, resulting in a standard deviation lower than that of the individual shares.

Question 16

Other things held constant, (1) if the expected inflation rate decreases, and (2) investors become more risk averse, the Security Market Line would shift

Accepted Answer

The answer of Other things held constant, (1) if the...

Question 17

Which of the following statements is correct?

Accepted Answer

A share can be highly positively correlated with the market but still have a beta less than 1 if its volatility is lower than the market's.

Question 18

Which of the statements is most correct?

Accepted Answer

The answer of Which of the statements is most correct?
...

Question 19

According to the capital asset pricing model, which of the following shares should have the highest required rate of return?

Accepted Answer

According to the capital asset pricing model, the required rate of return is proportional to the beta coefficient of the asset. Hence, Alpha Automobiles, which has the highest beta coefficient, should have the highest required rate of return. The standard deviation or the ratio of standard deviation/beta is not relevant in determining the required rate of return according to the CAPM.

Question 20

Which of the following statements is correct?

Accepted Answer

None of the statements are correct.

A) If the returns from two shares are perfectly positively correlated, the portfolio's variance will be equal to the average of the individual variances.

B) A negative beta only means that the asset's returns move in the opposite direction of the market. The expected return can still be positive or negative depending on other factors.

C) The CAPM predicts that higher risk (measured as beta) will lead to higher expected returns, not higher standard deviation of returns.

D) A well-diversified portfolio with a large number of shares will still have market risk, but the risk will be lower than that of an individual share with a beta of 0.5.

Quiz 8: Risk and Rates of Return

Which of the following is not a difficulty concerning beta and its estimation?

Which of the following statements is most correct?

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Which of the following statements is most correct?

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is false?

You have developed the following data on three shares: If you are a risk minimiser, you should choose Share if it is to be held in isolation and Share if it is to be held as part of a well-diversified portfolio.

In a portfolio of three different shares, which of the following could not be true?

Share A has a beta of 1.5 and Share B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

All else equal, risk averse investors generally require returns to purchase investments with risks.

According to the following information, which of the shares would be considered riskiest in a diversified portfolio of investments?

Which of the following statements is most correct?

Other things held constant, (1) if the expected inflation rate decreases, and (2) investors become more risk averse, the Security Market Line would shift

Which of the following statements is correct?

Which of the statements is most correct?

According to the capital asset pricing model, which of the following shares should have the highest required rate of return?

Which of the following statements is correct?